Saving For Your Child’s College Education: Tax Smart Strategies

Tackle rising college costs with these tax-smart strategies to help your child with saving for college.
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Beau Bryant

As a parent, it’s normal to want to go above and beyond for your children. For many parents, that includes helping them shoulder the financial burden of higher education. With college costs rising at a level that outpaces inflation recently, it’s imperative to begin saving for college as early as possible. Looking ahead to the future, toddlers today, who will enter college around 2039, are estimated to encounter annual costs of approximately $38,429.51 for tuition, fees, room, and board at an in-state public school. The yearly expenditure could reach around $88,311.81 for a private college experience.

While financial aid, scholarships, and grants can help cover college expenses, you can’t rely on them to cover the full cost. Below, we’ll discuss common strategies for saving for college that you can begin using now, and which are tax-savvy, too.

Saving for College Strategy #1: 529 Plans

A 529 plan is one of the more popular tax-efficient methods used for saving for college. It offers tax benefits by allowing funds to be used for qualified education expenses for a specific beneficiary. Contributions to the account are taxable, but the invested money grows on a tax-deferred basis, and withdrawals used for qualified expenses are exempt from federal taxes. The annual contribution limit for a 529 plan aligns with the annual gift exclusion amount, which is currently set at $17,000 per beneficiary for 2023.

There is a way around this contribution limit. Those who have the resources can utilize a technique known as “superfunding.” This involves contributing five years’ worth of gifts at once, per person, without incurring gift tax. For example, parents or grandparents could contribute $85,000 individually or $170,000 as a couple when the child is young. This allows the funds to grow significantly over time, with the opportunity for a substantial account balance by the time the child reaches college age. However, the rules regarding superfunding can be complex, so it’s often helpful to seek guidance from a financial advisor before utilizing this strategy.

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Saving for College Strategy #2:  Custodial Accounts

Custodial Accounts, such as those created under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA), allow you to establish a trust for a minor by contributing money or assets. As the trustee, you have full control over managing the account until the beneficiary turns 18. At that point, the beneficiary gains ownership of the account and can use the funds for any purpose, not limited to educational expenses.

While there are technically no specific contribution limits for these accounts, it is recommended to keep individual contributions below $17,000 annually to avoid triggering the gift tax. It’s important to note that these accounts classify the funds as the student’s assets rather than your own, which can affect the child’s eligibility for financial aid.

Saving for College Strategy #3: Traditional and Roth IRAs

An Individual Retirement Account (IRA) is a tax-advantaged savings account primarily used for retirement savings but can also be utilized for saving for college expenses. The SECURE Act has made IRAs more appealing for college savings by removing the age restriction on contributions. This allows individuals to contribute to an IRA at any age as long as they are employed.

It’s worth noting that early withdrawals from an IRA to cover qualified higher education expenses for oneself, a spouse, children, or grandchildren are not subject to the 10% penalty, although income tax may still apply for a traditional IRA.

SEE ALSO: How to Teach Adult Children Financial Independence


While using retirement funds for a child’s college tuition is an option, it may not always be the most prudent choice. It’s important to ensure you have enough retirement savings outside of the IRA you plan to use, as withdrawing funds without the ability to replenish them can jeopardize your financial security in retirement. Additionally, distributions from an IRA are considered as income on the following year’s financial aid application, potentially affecting eligibility for need-based financial aid that your child might have otherwise qualified for.

Concluding Thoughts on Saving for College

The escalating costs of higher education pose a significant challenge, but there are solutions to address this issue. It is vital to start planning early on for your children’s college expenses in order to maximize your opportunities to save. The strategies discussed above can help you prepare for the expenses associated with higher education while also enabling effective tax planning strategies.

Are you hoping to help your children afford college? We can help! At Resolute, our financial advisors are experienced in helping clients build comprehensive financial plans that incorporate saving for college. If you’d like to learn more about our services, please reach out to us today.

The views expressed represent the opinion of Resolute Wealth Advisor, Inc. (RWA). The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While RWA believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and the RWA’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in equity securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.

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